Q1 2022 Cresco Labs Inc Earnings Call
[music].
Hello, everyone and welcome to the cross Cleanups first quarter, Chief Hudson 20, <unk> earnings Conference call.
My name is Victoria, and I will be quaint your call today.
If you'd like to ask a question during the presentation you may do so by pressing star one on your telephone keypad.
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<unk> asked a question. Please ensure that your line is on mute locally.
I'll pass over to your highest Megan <unk> to begin. Please go ahead.
Thank you good morning, and welcome to Chriscoe Labs first quarter 2022 earnings conference call on the call today, we have Chief Executive Officer, and co founder Charles Bechtel, Chief Financial Officer, Dennis <unk>, Chief Commercial Officer, Greg Butler, who will be available for the Q&A. Prior to this call we issued our first quarter earnings press release, which.
It's been filed on SEDAR and is available on our Investor Relations website. These preliminary results for the first quarter of 2022 are provided prior to the completion of all internal and external reviews, and therefore are subject to adjustments until the filing of the company's quarterly financial statements. We plan to file our corresponding financial statements and MD&A for the three.
Three months ended March 31, 2022 on SEDAR and Edgar later this week.
Certain statements made on today's call may contain forward looking information within the meaning of the applicable Canadian securities legislation as well as within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of $19 95. These forward looking statements may include estimates projections goals forecasts or.
<unk> that are based on current expectations and are not representative of historical facts or information such forward looking statements represent the company's beliefs regarding future events plans or objectives, which are inherently uncertain and are subject to a number of risks and uncertainties that may cause our actual results or performance to differ materially from such form.
Looking statements, including economic conditions and changes in applicable regulations.
Additional information regarding the material factors and assumptions, forming the basis of our forward looking statements and risk factors can be found in our earnings press release and in Chriscoe labs filings with SEDAR and the Securities and Exchange Commission.
<unk> does not undertake any duty to publicly announce the results of any revisions to any of its forward looking statements or to update or supplement any information provided on today's call. Please note that all financial information on today's call is presented in U S dollars and all interim financial information is unaudited. In addition, during todays conference call.
Chriscoe lab will refer to certain non-GAAP financial measures such as adjusted EBITDA adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to our earnings press release for the calculation of these measures and a reconciliation of the most directly comparable measures calculated and presented in it.
Gordon with GAAP. These non-GAAP financial measures should not be considered superior to as a substitute for or as an alternative to and should only be considered in conjunction with the GAAP financial measures presented in our financial statements with that I'll turn the call over to Charlie.
Good morning, everybody and thank you for joining us on the call today, we've got a bit to cover so we'll jump right into it while Q1 was a slower quarter for young industry. That's been conditioned to expect incredible growth without much impact from traditional seasonal trends, we understand that in emerging industries growth trajectory is rarely linear, especially in a highly <unk>.
Weighted industry with a fragmented state by state structure conflicting federal and state laws and the addition of some general macro pressures affecting everyone.
Our team continues to drive towards the macro thesis of candidate is becoming a core U S consumer product industry and we're dedicated to executing a focused disciplined strategy for long term industry leadership.
We're building the most strategic geographic footprints, we're obtaining material positions in each state and we are proficient in all verticals of the value chain, while emphasizing branded products and distribution to drive the greatest long term value and.
In Q1, we showed the resilience and strength that resulted from this focused strategy, we produced $214 million in revenue, representing a 20% year over year growth.
Our adjusted gross margin was 53% roughly 350 basis point improvement year over year adjust.
Adjusted EBITDA margin was 24% up 400 basis points year over year.
And we maintained our position as the number one wholesaler branded cannabis products in the industry as well as having the highest per store revenue of any scaled national retailer.
We continue to compete incredibly well holding or gaining branded share in the majority of our markets with our markets down an average of four 5% sequentially. Our revenue was only down 2% as was the case in Q4, our incredible critical family team members took everything that this quarter was willing to give.
Now, let's again review our proven playbook of the three specific ways critical labs is delivering long term growth and shareholder value that we introduced in 2020 number one developing the most strategic geographic footprint through organic growth and accretive M&A to being the leading wholesaler with branded cannabis products and three operating high volume strategic.
Retail stores.
Number one we are developing the most strategic market footprint through organic growth and accretive M&A.
The acquisition of Columbia care is the most efficient way for critical labs to achieve material positions in the most strategic markets in the industry, while we love the value that our current footprint provides the addition of Columbia cares market access makes critical labs unrivaled.
Columbia care will add eight additional markets to the critical lab's footprint, including the high priority States of New Jersey, and Virginia, and it provides depth vertical integration or the opportunity for asset optimization across the entire portfolio.
Combined our pro forma footprint covers 180 million Americans are 55% of the total U S population and 70% of the addressable cannabis market. Our pro forma footprint is expected to be at $31 billion total addressable market by 2025, According to BDSI, including all 10 of the industries.
Top 10 revenue states.
We expect to have the number one branded <unk> retail share position in five markets, Illinois, Pennsylvania, Colorado, Virginia, and Massachusetts, as well as eight states each contributing over $100 million in annual revenue in 2023.
Again, this level of depth and breadth in the industry's largest markets is unrivaled. It provides diversification that helps insulate us from market to market volatility and we believe it will provide us with the economies of scale, leading to superior margins meaningful brand equity and long term competitive moats and.
On Colombia cares call on Monday, they talked about the strong performance. They saw in the first month of adult use sales in New Jersey. This is just the first of many adult use catalysts in our portfolio on a pro forma basis, we have leading positions in Pennsylvania, Ohio, Maryland, and Virginia for markets that are likely to go adult use in the realm.
Near term.
These four along with New York, and Florida represent some of the biggest industry catalyst in coming years and critical labs has exposure to all of them, while any form of federal banking and tax reform will be material the demand from the cannabis consumer and progress with state accessibility continue to be the bellwether for the cannabis theme.
<unk>.
We're making significant progress on the closing of the transaction on our previously communicated timeline of around year end.
On Monday, we accomplished our first major milestone is the transaction cleared the federal HSR review the next milestone Columbia care shareholder vote will occur. This summer on the state level, we've been working closely with regulators to ensure a smooth progression towards the deal approval as most know the reputations of critical labs in Colombia care.
Have foundations rooted in regulatory compliance and working with regulators to build the most responsible respectable and robust industry possible. The regulatory process is reasonable manageable and we do not expect it to be an issue for our closing timeline.
In a few states, where we will have divestiture requirements, namely, Illinois, Massachusetts, Ohio, New York, Florida in Maryland, We have started the sales process and have been very pleased with the progress thus far our official RFP process was launched last week based on the initial expression of interest we're confident that this will be a smooth and successful.
Yes.
The acquisition of Columbia Gear is a major step in building the most strategic footprint and long term industry leadership, while the closing and integration planning is hard work and we're all enthusiastic for the post closing look at critical labs. Our team has not taken their eye off the ball and continues to execute operationally and compete well in all of our markets.
Number two we maintained our leadership as the number one wholesaler of branded products in the cannabis industry.
Q1, net wholesale revenue was an industry best $95 million for the quarter Chriscoe products, where the top portfolio of branded cannabis products. According to BDSI. We were the industry's number one seller of branded flower number one seller of branded concentrates number two seller of branded <unk> and a top five seller of branded.
Edibles, we referenced BDSI, because we think it's the best source for branded sales similar to how traditional CPG would quote Nielsen or IRI data internally. We're focused on growing branded share is that demonstrates our ability to create a differentiated product that consumers love.
In Illinois, we maintained our position as the number one seller of branded cannabis in the state we're incredibly proud of the Illinois team and their unrelenting focus on continuously improving operations and leading this market with world class execution. This team launched floor account premium artisanal flowers and concentrates just in time for the 420 holiday two and incur.
Credible reception and sold out shelves the floor Cal launch is a good example of several key points of our operational execution as it shows one our ability to take a successful brand from one state, Florida now the number four flower brand in California across our footprint.
Number two our ability to successfully introduce a premium price product during a period of general price compression, thereby stretching and broadening the price index of available product categories and widening the delta between each three our ability to produce premium products a term that is way too easily thrown around in this industry.
And for the importance of having an intelligent brand and product portfolio of architecture, including a variety of differentiated value propositions to meet the consumers where the consumers want to be met in Pennsylvania. We're also the number one seller of branded cannabis products for BDSI and our continually improving flower offerings.
Lifted us to the number two share position in the state for flower in the quarter, we continue to lead the vape and concentrate categories. While we're proud of our current performance. We are incredibly excited to see what happens when we launch our Florida Cal flower and concentrates in Pennsylvania later this year.
In Massachusetts, where we saw the most headwind in the quarter, but remained number two in branded share we're working through our integration process aligning cultivate on all our systems and aligning our production across cultivation facilities, even with the mentioned headwinds we continue to compete well and have effectively closed the gap between us and the number.
<unk> branded share position at the end of the day, we focus on creating branded products that consumers love and getting them on the shelves is close to the consumer as possible. The Columbia care acquisition will allow us to get these products in front of more consumers and more states expanding brand equity and driving wholesale growth for years to come.
Number three we're operating the most productive retail stores in the most strategic markets.
Q1 retail revenue was $119 million with same store sales growing 9% year over year Sunnyside continues to rank number one among the scaled national operators with an average quarterly revenue per store of $2 $5 million in Florida. We finished our manufacturing kitchen and brought edibles to our stores for the first time mid quarter.
This is a huge unlock for us as we look to be able to provide the full selection of <unk> products to patients in Florida. In addition to flower. We now have launched <unk> under the high supply and good news brands Sunnyside twos and remedy tinctures over the course of the year, we expect new store openings in Pennsylvania, and Florida with store opening.
Is weighted towards the back half of the year.
Core to the success of 70 side is better assortment throughput location and experience strategic retail will continue to play an important role in the success of our business generates near term ROI and supports long term sustainable wholesale success.
We look forward to adding new stores to our retail footprint as part of the Columbia care transaction as it makes critical labs, the most well rounded formidable competitor possible and sets us up perfectly for our long term vision and.
In summary, critical labs continues to execute on our established strategy of creating the most strategic geographic footprint possible with material market shares in each state by being the number one wholesaler branded cannabis products and operating the highest volume strategic retail this strategy remains constant and the Columbia care acquisitions since.
<unk> fits these stated priorities hand in glove.
With that I'll turn it over to Dennis to discuss Q1 results.
Thank you Charlie and good morning, everyone.
Begin by reviewing the financial results from the quarter, then highlight a few items from the balance sheet and discuss our capital position.
Our first quarter revenue was $214 million up 20% year over year as already noted by several of our peers the quarter was impacted by macro pressures that stress the consumer wallet and seasonality.
While we saw a sequential decline of 2%, we outpaced our markets, which saw a four 5% sequential drop in the prior quarter.
Adjusting for Massachusetts alone the remaining portfolio achieved 2% growth in the quarter.
Q1 revenue mix was 44% wholesale and 56% retail retail performance was particularly strong growing 44% year over year, driven by same store sales, increasing 9% and store growth in Florida and Pennsylvania.
Retail was up two 3% sequentially.
Net wholesale revenue was flat year over year with growth across almost all of our markets offset by meaningful but strategic attrition in California associated with our shift away from third party brand distribution.
Wholesale revenue declined 6% sequentially.
The main driver was softness in the Massachusetts market driven by a mix of factors.
The overall, Massachusetts market was down 7% with lower price per pound, especially on lower THC products.
This had a disproportionate impact on us as the harvest from our new capacity in late Q4, and Q1 had lower than normal potency, which relegated that product to the most price competitive category.
Additionally, in Q1, we transitioned to cultivate operations to align with our operational systems cultivation methodologies and brand manufacturing, which caused some short term disruptions.
These issues are now behind us, but again as Charlie stated we maintained our number two branded share position in the state and effectively close the delta between us and the number one share spot not bad for the first quarter, becoming integrated business.
Looking at the second quarter and the rest of 2022, while we have started to see some signs of improvement in March and April trends. We believe it is too soon to call. It churn beyond just typical seasonality as.
As such for now we are maintaining a cautious outlook for relatively flat community growth in Q2.
First quarter adjusted gross profit, excluding the fair value markup of acquired inventory was $113 million with.
Just a gross margin of 53% down from 54% in Q4, as a result of lower revenue and pricing pressure, particularly in Massachusetts and California.
Over the last 12 months, we've seen a 350 basis point improvement driven by achieving operational scale and more markets.
The strategic decision to shift away from third party branded distribution in California, and our entry into the vertically integrated high margin, Florida market.
Looking ahead, our goal is to maintain gross margins above 50%.
We will continue to see improvements from the investments, we are making today and organizational structure automation for processing and packaging and increased cultivation yields to offset the likelihood of further price compression.
First quarter SG&A expense, excluding share based compensation and non core items was $69 million or 32% of revenue.
The increase in SG&A was primarily due to the additional four new dispensaries fully integrating the loral harvest and <unk> acquisitions Merit based compensation increases and adding new employees during the quarter as we make investments for future growth.
We will continue to make investments in our people processes and systems. This year as we build the industry's leading company for the long term.
Adjusted EBITDA for the quarter was $51 million, representing a margin of 24%.
The decline of a couple of hundred basis points sequentially. It was a result of lower gross margin and the additional SG&A expense.
We have room for operating leverage, especially on the wholesale side of our business as we exit a seasonally slower part of the year.
Cash used in operation was $3 million.
This was primarily driven by the accumulation of $20 million of inventory sequentially.
Proactive purchasing actions to reduce the impact of global supply chain challenges and inflation.
We fully expect these investments in working capital to reverse in the coming quarters, and the proactive purchasing should lead to lower input costs and higher operating cash flow throughout the rest of the year.
We also built a floor sell inventory in Illinois in Q1 to prepare for its incredibly successful for 'twenty launch date.
First quarter gross Capex was approximately $33 million, including a $23 million cash purchase of property in New York.
We remain very excited for the positive impact of Colombia care acquisition, we will have to lessen our needs for capex to drive future growth.
We are also evaluating our footprint and exploring how to maximize value from potentially redundant assets as we continued to optimize our national footprint.
We expect to generate enough cash over the remainder of 2022 and have access to strategic and efficient sources of capital to fund our capital needs.
We are developing a leading CPG company, making the investments in facilities people and processes that will allow us to lead this industry long term and generate value for our shareholders.
And with that I'll pass it back to Charlie for some closing remarks. Thank.
Thank you Dennis I'm incredibly excited about what lies ahead for <unk>, while the inflationary pressures are real and are impacting many aspects of the consumer goods markets. It emphasizes the need for cannabis operators to get better more efficient and offer more value to the consumer.
Cannabis is a unique catalyst that most consumer categories do not have a robust shadow market sitting alongside us and elicit U S. Cannabis market. That's conservatively estimated to be in excess of $100 billion annually. There are two main things that we can do to help convert these cannabis consumers to this burgeoning regs.
<unk> cannabis market that is already exceeding $25 billion in annual sales employing over 400000 people in the U S and generating billions of dollars in annual tax revenues, one create the scale operational proficiencies and strategic initiatives that will allow you to offer products with a higher perceived value to the.
<unk> and to engage to drive reform at a regulatory level.
As stated throughout our prepared remarks today Chriscoe labs is focused every day to execute on doing both.
From my perspective, as the CEO of critical labs, and as the chairman of the National cannabis round table, we have never been closer to achieving some form of federal regulatory reform than we are right now.
While nothing in politics has it given it does reinforce that now is the time to lean in the ultimate unlock for this industry as normalized banking and taxation.
All of the other phenomenal benefits a rocket ship job creation entrepreneurial opportunities social equity and justice initiatives and total economic impact start with normalized banking and taxation on the strategic initiative front, our Columbia care acquisition payers, the best consumer brands with a broad deep and strategic.
Along with scale and revenue diversification that is unmatched and allows us to offer more differentiated products with the highest perceived value to more customers across the country.
In closing the market volatility and industry headwinds, we faced over the past few months have made it even more clear to us that this was the right strategic move for our business and for the industry.
With our operational and strategic initiatives underway, we will continue to keep our heads down execute on the business and put the pieces in place for long term leadership and achieve our vision of being the most important company in cannabis with that ill open the call for questions.
Thank you we will now start our Q&A session, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Yeah, It's really a question please press star one.
Ask your question. Please ensure that your line is omni to likely.
And our first question comes from Alan at Jefferies. Please go ahead. Your line is open.
Good morning, guys hope all well and just first question on the floor account launch into Illinois and.
Just curious from a few questions around this curious in Tianjin.
Would you be premium not being priced relative to the broad market.
So interested to hear if it is kind of realizing the rest of your portfolio or sourcing from competitive brands and then any data around trial levels how.
How much youre seeing in terms of repeat purchases and then finally kind of plans for further Rollouts you mentioned <unk> would it be fair to assume you may target states, where we're seeing increased pricing practices, sorry, a few questions around that.
Okay.
Are they going.
May I ask for a couple of repeats.
On the questions, but yes from a from a premium level.
And this is Charlie about the way the premium level, we were excited to as I mentioned being able to introduce a new product into a very competitive marketplace at a premium price point that is at the top of the.
The scale in Illinois, and have the reception be as strong as the reception was and not only in sales, but in public feedback as all know cannabis consumers fairly vocal and they.
Sure their opinions on social media fairly regularly and it was just great to see the reception that the product got and what it did is it validated the thesis that that.
The value.
The perceived value.
The consumer is looking for is really what drives their behaviors. So if the quality is there they'll pay for it they will pay for the quality that you are offering.
It was very exciting so again top price point in Illinois.
It is something that I'll, let Greg talk more about.
The specific other impacts that you mentioned I think cannibalization and then likely next states that we'll we'll be deploying and launching the product into Greg good morning.
Just a couple of thoughts were saying they would say it's still relatively early from our launch.
<unk> truly was in advance of $4 20, but to Charlie's point, we are seeing some encouraging start.
And a weekly thing.
Like I know your question was cannibalization, how we look at that is outlets buying that bought on the first purchase.
Grew as we got into the second week. So I think that let's buying is plus 20%. So more accounts continue to buy we're seeing more placements.
Due to the growth of those accounts are buying they're buying one more unit as each week goes on.
And then also most important metric.
<unk> Health, Inc.
That's increasing as well in the double digits each week over week. So customer accounts are buying it are continuing to support it and I think your question was Ah repeat purchasing and then I think the part.
C of your question on Florida, I was also a cannibalization off of core business.
As it sits right now we're not seeing that materially.
Any sort of slowdown on either <unk> or high supply and once we get the latest BDSI data what we're hoping to see is that actually helps us continue to like strengthen our share position in Illinois, and see where that source of volume is coming from outside of our own portfolio.
Okay Awesome function I know its just the next question you mentioned the launching PAA would.
Would it be fair to assume you, perhaps targeting states why were seeing increased pricing pressures right. Now so you can bring in that premium product.
Absolutely I think if you look at our target.
Where we would like to go next what we've publicly stated as Michigan, We think Theres, a big opportunity for us to bring floor tile products in the Michigan and we think there's a big opportunity in Massachusetts. There is an opportunity in Pennsylvania and there is also an opportunity in Florida as we think of kind of the next market zero, while we're also strengthening its position.
In California, which is also quite pleasingly, we're expanding outside of California, but even in California floor account remains one of the top four flower brand in the state. So we're able to kind of hover our core while expanding.
Okay Awesome and then just one quick follow up on the same store sales increase nice increase there I was just wondering any color on what state to perhaps driving this in any particular drivers you could call out I mean is it greater footfall higher basket size and if any particular.
Overall I don't think we don't tend to give it to one of our state specific information on the road to tell you is from a growth in same store sales, it's a little bit more on the trip side baskets continue to stay relatively whole for Q1.
And so from a average basket size, we see some material growth, but really trip growth is what is driving that from an overall revenue perspective.
Okay, great. Thanks, guys very helpful.
Thanks Alan.
Thank you so much for your question.
Our next question comes from Camilo Lyon at <unk>. Please go ahead.
Thank you good morning, everyone.
I have a couple of questions. The first one we have is just an update on the divestiture process.
And specifically, how youre thinking about which assets to proceed with in New York, If there was some sort of.
Evolution in the thought process there as it relates to your assets.
Your capex in that market.
Or.
The Columbia care assets. So that's my first question.
Alright, good morning, Camilo I'll start with your first question.
We haven't.
And we're not going to provide very specific details on the specific assets included.
The states themselves of course have been identified but there is there is some opportunity for optimization as the process continues to unfold on the very specific assets in those states that would be included could be.
Based on.
With buyer requests.
Opportunities to optimize.
The proceeds depending on the mix, so I'm not going to give too much specifics there, but the process in general itself going really well and we're very pleased with.
In bound interest I'm pleased with the team's performance.
Putting everything together and the structure of it so and also of course definitely the conversations with regulators everything is going really well.
Good that's great to hear that that process is unfolding.
As you described is it fair to assume that when the launch in New York happens for adult use that you will be ready in whichever asset you end up deciding to go forward with.
Yes, we will have we will have product ready for New York when adult use launches.
Okay.
Is the is this the general range that I think we outlined.
On the announcement of the deal.
For proceeds of $3 million to $400 million is that still a good range to stick.
Question.
Yes, we don't we don't see risk to it and again.
We're going to we're going to encourage the buyers to make their offers.
We're liking the inbound interest and hoping to create a competitive environment.
But yes, we don't do.
Good.
It's great to have.
And then Charlie My last question generally for Ya <unk>.
Maybe you could help us understand or think about the gross margin.
Evolution throughout the rest of the year.
Q4, Q1, where we're challenged quarters high levels of promotion, maybe some slowdown in demand.
But there certainly seems to be as you guys. Also noted an improvement in demand here in March and April , which I think is actually continuing to demand from some of the data that we see.
Have we hit the nadir on gross margins.
For the year and should we see an expansion of gross margins going forward or.
Kind of holding at the level that you performed added in Q1, what's the right way to think about that progression. This year. Thank you.
I'll start and then Dennis feel free to jump in but.
We've historically done we sort of we want to make sure that we're maintaining gross margins above 50%.
And again the strategy that we've deployed including the <unk>.
Launch of premium products.
The continued focus on creating creating more scale more vertical <unk> where possible.
Including the market structure that allow for more vertical <unk> E Florida.
We think those are opportunities for us to may.
Maintain.
Our strong gross margin and the durability of it while we continue though to anticipate further competitiveness in the markets, including pricing pressure macro influence of inflation all of that so Dennis anything more to add yes, I think.
Just building on what Charlie said, we're taking actions now to try to combat some of the inflationary costs associated with parts that we're putting into our products.
Again, we feel comfortable with the 50% plus margin target that we gave on the over the long haul and that we'll be able to maintain that through the balance of the year.
Thanks, guys. Good luck with the rest of the year.
Thanks Miller.
Thank you so much for your question come alive.
Next question comes from Derek <unk> at Canaccord Genuity. Please go ahead. Your line is open.
Yes, hi, thanks.
Hey, guys just a question on Capex for the remainder of the year can you just give us some guidance on what you expect for Capex and where.
The bulk of these investments are going to take place.
Good morning Derik.
Good answer.
Derek Yes, when we look at cash Capex Theres certainly is.
As we rationalize the combined footprint of the two companies there will be a.
A smaller need for Capex as we go into 2022, we've made significant investments over the last year or so in a number of states in Michigan, Florida, Ohio. So a lot of the large capex expenditures exit New York have been made previously so we will continue to make investments as needed to improve cultivate.
<unk> add to automation, we've got a number of stores that will be opening in Florida, and Pennsylvania. During the course of the year. So there will be continued capex needs.
Last quarter, we threw out a number of about 100 million for the course of the year I think that number will come down as we do the evaluation.
And the needs between the two combined companies going forward.
Yeah.
Okay. That's helpful and then in terms of.
Your own own brand sales through your store through your existing stores, where you're still in that sort of 40% plus range that I think you guys quoted last quarter.
Yes.
40% give or take depending on the market.
Okay and then just last one for me just in terms of California.
We've been hearing that obviously, there has been a challenging pricing environment more supply coming online supply exceeding cultivation supply coming online exceeding that of store growth, but also hearing that we are seeing some stabilization recently in the pricing environment can you can you comment on that and have you seen any.
That would imply that some stores where are likely to close down have you seen any of that take place so far.
So look.
As we've talked previously I think California is going through a process right and it's something that we've seen in other markets with maybe comparable regulatory structures that have played out over the years.
Just just.
Earlier, Colorado, Washington, and Oregon et cetera.
Boom bust sort of thing and then a rebuild and sort of who is left standing.
We've seen increases in greater support come in after the fact I'm not sure that we're ready to call, California being there yet.
And I'm sure Gregg has some additional details I think building on the last one from Charlie which is calling California is looking at.
Q1 here average price points in the market did continue to decline sequentially down over a buck on average from about $9.
Programmed about eight.
30 Gram by Q1.
Prices continue to decline I think the one concern about California, two in some of our other markets, where we see price compression, but unit growth in California, you're seeing both you're seeing prices come down but also unit growth also declined which means there is a combination of total revenue was down because of price per units are down, but also consumer demand the purchases in the tracked.
Market also continues to be down and that is probably related to more macro.
Issues driving.
The total market.
California as we as we closed Q1 still had some tough macro headwinds against it we were very pleased as we talked about how we were able to continue to grow our share across our segments in the state, but from a macro perspective, Derek I think you need more time to see how that flushes out I don't think anyone prepared to call a quote.
Bottom in the market yet.
And sorry, if the unit growth decline solely related to macro challenges are that it is.
The gray market or illicit market, taking incremental share.
There's no perfect way to get that information, but I would tell you if if.
Considered wallets are shrinking and there is tough household income issue pressures.
Surely that is both a question of whether thats consuming less or buying from other markets.
Would be a driver, but the net takeaway being in the track market legal track market unit volume continues to decline.
Okay that makes sense. Thank you very much.
Thanks Derek.
Thank you very much for your question our.
Next question comes from Andrew <unk>.
Stifel. Please go ahead your line is open.
Hi, good morning, Thanks for taking my question.
Maybe continuing on on discussing margin.
Im trying to get a little bit more color on seasonal trends.
Could you give us.
A sense of the level of impact from systemic pricing pressure like you mentioned on in Massachusetts on pricing.
Versus seasonal promotional trends.
Which in Q1, maybe you could give some color whether.
Higher promotion or lower promotion versus Q4.
Is it also fair to say that Q2 is typically a higher promotional period.
Versus Q1.
And.
Assuming.
The systemic pricing pressure remains the same and you alluded to flat sales in Q2 should we.
<unk> continued margin pressure in Q2.
Good morning, Andrew Thanks for the questions.
Let's start on that one yes, I can start and then pass it along to Greg.
We don't give specific guidance on margin, but if we look going forward into Q2 some of the dynamics that we saw in Q1 around pricing and some of the inflationary pressures that we saw those will continue into Q2 now there'll be some mix variance across different state lines that.
We will help offset part of that and some of the automation and efficiencies.
Efficiencies within our facilities will help offset some of those pressures. So we feel pretty comfortable that what you saw in Q1 will be repeatable.
In Q2 at a macro level, there may be some pluses or minus variations from that but we feel pretty comfortable with that level, especially if you could state by state.
It could vary state to state.
We see Massachusetts start to get a little bit.
Increased sales in Q2, and we see Florida pick up as we add some more stores to our Florida operations and added our edibles and.
Kitchen products into those stores, we should see higher margins that come out of Florida, and Massachusetts compared to our average gross margins.
We will offset some of the pressures that we see in inflation in.
Price pressures.
I think the second part of your question was.
Price promotional activity.
Right, historically Q3, particularly as one of the biggest quarters in the market on that seasonality in size. Just there is more trading days better trading days within the quarter.
Historically, you've also seen increased pricing activity in the quarter, but I think what we're seeing this year is this pricing activity across all quarters. So I don't we're not predicting necessarily it's going to intensify to the price activity in the quarter, but we're watching very closely is we expect.
Each month to get a little bit stronger that's just how the market tends to trend.
And in order for our industry to continue to show the double digit growth that everyone wants her or high single digit growth that everyone wants these weeks have to get bigger and bigger right. So not only have to they have to improve because we expect that but they have to get bigger than they were a year ago and so I think when everyone asks us about just looking at the future, we do expect to see things improve but.
We need to continue to see this market accelerate.
In order to show year over year growth and as we stand right. Now we are seeing improvement, but we are cautiously optimistic on if that improvement is accelerating into the back half we haven't seen it necessarily accelerating as we've gotten into April .
Yeah.
Appreciate that color and Nonorganic performance could you provide your sequential same store sales growth.
And.
If you could discuss if you benefited or were impacted by the recall and Pennsylvania.
How are those trends looking like thus far in Q2, especially in Pennsylvania with the vape recall.
Okay.
Okay.
So thanks for the question on the Vape recalls the duration, Pennsylvania continues to be a strong.
Market for us.
We did see some growth in from Q4 over Q1.
Some of that could have been the vape recall I would remind just.
That that particular recall had an impact on some suppliers not all suppliers. So it wasn't the entire market lots of its entire supply.
What we're encouraged about is more is the performance of our products in Pennsylvania. I think we are encouraged this is our vape products in particular, we continue to have a leading market share in the state even though we don't have a leading number of doors position. So it does tell you how strong the products perform within our stores, but.
Within our partner stores and.
And so that for us continues to be an encouraging spot permit from our stores.
Same store sales perspective, as Dennis mentioned earlier, we don't tend to give state specific callouts for that but what I will tell you in Pennsylvania.
From a store perspective.
Right now most of our growth.
That is continuing to come from.
Growth in our existing stores and also growth in some of the new stores like Ambler that we brought on at the beginning of the year all of our new stores that we'd be bringing online will happen in the back half of this year early next year and that will be the incremental growth on our retail business in the state.
And then just to build on to that when you look at.
Organic growth.
The impact of the acquisitions that we hadn't Laurel harvest secure pen both of those deals closed in December there were three stores with <unk> and only one store with Laurel harvest that was open at that time. So the impact from Q4 to Q1 is pretty minimal.
Thanks, So then I'll get back in the queue.
Thanks, Andrew.
Thank you so much for your question.
Question comes from Ken Recti, ATB capital market.
Please go ahead your line is open.
Thank you and good morning.
Charlie I Wonder if you could provide some insights on just how in the context of the California market dynamics.
Cool.
Pivoting away from third parties on brand are valuable laws of however, you choose the decline value and the Californian market given that backdrop, just trying to see you know not only how valuable a lot but also.
Our SaaS.
The market in SaaS with.
The end customers.
Sorry.
Good morning, Henrik can you repeat the back half of the question, So in California, and our move away from third party.
Take it from there, yes, so I'm sorry, Tony.
All available to you was that you're choosing to define value in the context of that market, where there was strategically or from a margin perspective and then the second one is how is that decision sitting or settling in the market. Although it is it resonating hasn't been pushback what is the read through from sort of that first full quarter for want of a better way to characterize it.
Yes.
Got it no I think the pivot the value from the pivot is.
<unk>.
Is.
Significant in multiple ways right. It allowed us to optimize the business out there both from a margin perspective, and also focus 100% of our attention on driving our own brands and I think you've seen the sort of improvement.
In Florida, <unk> positioning and some of our other brands out there too by having that increased focus on it. So from a P&L perspective of course, I think it helped us manage California more effectively as far as feedback from the market at this point, we've created that stabilization and the the change this ship.
<unk> has been absorbed so again I think it.
It lends credence to the.
The strategic nature of the decision that it was the right thing to do glad that we did it and now we move forward is as this version of <unk> and Kelsen, Greg anything else to add no I think the only add to that Henrik Reviewable youre commenting on.
We alert as their business change anything from our decision to remove some of the partners. What I'd say is what we talked about in the last call was we did expect to see some sort of distribution dip as some accounts that historically had bought our partner brands may not buy it because we don't have the breadth of our portfolio as we got into Q1.
This year we're.
We're encouraged by is we were able to pick up some of those doors again with our own brands. So we're starting to backfill volume we had on partner brands.
As we talked before we're a bit hollow revenue.
With brands on our portfolio that gives us a much better margin profile. So we are encouraged to see that.
That's really helpful color, Thanks, and just switching to the Massachusetts quickly.
Challenging in the fourth quarter.
While there was some progress certainly in the first quarter is still challenging how much of that is is a way issues within your control how much of that is just how tough that Massachusetts market was even relative to sort of what it was just broad weakness in the overall kind of market.
Any thought there.
How to think through not just how you performed in Massachusetts in quarter, but youll confidence around the.
Your business in that market as we sort of move through the year with the integration of increasingly in the rearview mirror.
Okay.
Yeah, Kevin This is Charlie I'll start.
And then I think Greg has some additional color, but let me have yet, Massachusetts.
We would identify as somewhat unique in the and the pressures that we've seen there over the last two quarters again youre talking about a market that had double digit growth sequential growth Q2, Q1 to Q2 Q2 to Q3 that just then when totally flat and then we saw it down from Q4 to Q1.
Similar to any of the other markets that are getting more competitive.
You are seeing.
Basically kind of a teeter totter approach to win additional capacity comes online versus when additional doors come online. So the long term outlook for Massachusetts, We still think of course has upside.
Doors opening and more highly populated Boston metro areas et cetera, but.
We're also reassured by the fact that as these markets get more competitive.
Were competing well.
Maintaining that number two share effectively closing the gap between us and number one means that we compete better in that market than our peers and so that's what we want to keep focusing on all of these markets are at some stage and in some way going to become more effective and more competitive as they grow so we like the way that we're competing Greg.
And then we are looking to add to that I would say as Charlie mentioned.
Please move with Massachusetts in this quarter as we were able to grow share overall in the state, particularly.
Particularly in base.
You look at our VA portfolio, we have a strong portfolio and we.
We're able to bring that into the market and continue to grow points of distribution on <unk>, where we took a pause.
Pretty pretty nice jump in our share position. Your second question was there anything on the integration side that maybe give us hiccups.
There always is and we will own that I think if you look at two areas in particular.
Which are just tough for us as we integrated one is.
On our edible side.
Just making sure that we've got the right now two facilities talking to each other we did have some stock outs on that as we went which you'll see in our shared data had an impact on our share.
We're continuing to close that in the second piece too is as we continue to expand the state the first harvest coming in and out of any expansion cultivation room are always a little bit tougher.
We wish we had a little bit higher potency is coming out of those first harvest I think we had at parity.
Potencies, which in the market like Massachusetts that has a lot of lower potency biomass available.
That's not a competitive position, but we're starting to see our next round of harvest coming out and we're very encouraged by what we're seeing.
Which means we expect to see not only growth in our vape share we expect to get our edibles business back on with some of that supply hiccup, but then also really go after and take share in flower.
Great. Thanks, so much ill get back in queue.
Okay.
Thanks, Patrick.
Thank you for your question. Our next question comes from Aaron Grey at Alliance Global Partners.
Please go ahead your line is open.
Hi, good morning, Thank you for the questions.
So first question for me I, just wanted to touch on Pennsylvania still doing well on a relative basis, what's your guys' market share.
So as you guys continue to rollout stores.
It gives you opportunity to expand that market share just one thing about how you look to maybe how much of your own products. You aim to have within your own stores as you look to open up additional stores for the remainder of the year versus third party brands, especially in a market where you are seeing some pricing pressure.
Market that started to slow down a bit in growth. Thank you.
Good morning, herein, Greg will take that.
Hey, good morning.
Our view doesn't change overall, what we tend to give us a guidance on how much of our own branded Assortments. We wanted her own stores, we have to realize we are in a partnership market we.
We sell into our competitors on the wholesale side and their partners as well and so as much as we list in our own brands I mean, we're buying less from our other partner brands, which means they buy less from us and that's just the reality of reciprocity agreements.
Within our industry. So we try to make sure that our assortment is the best of our brands, but also picking up the best of what our partners are offering us and so we don't we tend not to look at growing that percentage of our own shelves that are.
That our just our own business across the states, particularly like Pennsylvania.
From a new store opening what we're encouraged about is on the retail side.
We do have a number of new stores that we have not opened yet and we will be opening.
Late in the backend of this year early next year getting those ramped up that will give us incremental growth, but it also gives us not only more points of distribution to sell our own brands, but also more points of distribution to bring our partner brands.
Into our portfolio as well, which helps us on our wholesale side in the state.
Okay.
Okay. Thanks, a lot that's helpful. And then second question for me on Illinois, a market, where your market share leader in.
Just in terms of additional retail licenses coming online I know, it's something that's been delayed for a while just any additional outlook or color you might have there from competitions and then how you think about.
Your current cultivation state and obviously with the three cultivation licenses it.
It seems like right now you are kind of holding off on additional capex to say, just just remind us how youre thinking about in terms of the timing of additional retail licenses being awarded thank you.
Sure Aaron I'll take that might take it in reverse order, yes, we have capacity in Illinois, right. So we have the ability to absorb.
Additional retail coming online.
We eagerly await it now as it relates to the timing of it there's been I don't want to be overly optimistic, but there is some encouraging things coming out over the last 24 hours and also an anticipated hearing date coming up that might result in the lifting of the stay on the issuing of those 185.
Re winters. There is also movement to have that next lottery for an additional 50, so again.
There is there is.
New news there, but I also don't want to lean too hard into it hoping that that can get cleared up in 2022, So new stores opening in 2023, I think it is unlikely that we see new stores in the state in 2022.
Yeah.
Alright, great. Thanks, so much for the color I'll jump back in the queue.
Thanks Aaron.
Thank you for your question. Our next question comes from David <unk> at Cowen and Kai. Please go ahead. Your line is open.
Great. Thanks, so much for taking my questions. This is Harrison Ddos unpredicted.
The look back on.
A comment that you made Greg you said that basket has been holding relatively steady.
In the context of a challenging consumer environment, where wallets are shrinking what have you said what would you say are the biggest drivers of.
That basket of holding it.
Yes, I think one of.
The area, where youre going to see this.
Come to fruition as we get into the next couple of quarters here may not be on average basket size I actually think average basket size could go up but frequency of trips could go down.
And what I mean by that is.
You may not you may actually see each trip customers shifting to bigger formats looking.
Looking for deals at stores, increasing how much they buy on an individual trip basis, but start seeing the frequency in which they're shopping start to pull apart.
And I think Thats for Titan wallets are going to come into our market, where we have a pretty high frequency of visits of our.
Customers and patients.
And I think what.
Where the current macroeconomics will play out in consumer dynamics is you will see less trips coming into the store.
And you actually might see that then average basket size increase as they are trying to find better value for the trip or stocking up in one trip.
And then minimizing the frequency in which they are visiting.
Yeah.
Interesting Okay I appreciate the color and then just as a quick clarifier in California. How many doors are you are you distributing it to now just given the dynamics and I think last quarter.
Dennis I think or maybe it was you Greg that talked about a potential.
Acquisition strategy for potential complementary assets. So that's still part of the part of the strategy going forward.
But again, if you could just clarify on the door count.
Yes, let me, let me try that one as well and hit on it.
From a door perspective, we saw for we did about 497 doors in Q1 of 2022.
And that was versus what we talked about last earnings call, which is about 450 doors approximately.
So we did back to my earlier statement, we did see.
Nice growth in doors. After we had to lose some of our partner brands and lose some of those customers, but we were able to re bring them back into our owned brand portfolio.
So from an overall door perspective, continuing to hunt.
We feel encouraged that we've been able to take share of our own profitable brand in that market.
From an overall M&A and I am pretty sure that with me, who mentioned I'm looking at Dennis here.
We think it's done it how we think about M&A and taking it across our footprint is things like we have with workout.
Bringing really incredible capabilities and a solid strong brand with a story that can resonate across our markets.
Across the platform and as if we were to look at any M&A.
In that state or other state what we're really trying to find his capabilities that are accretive to our portfolio.
So that's kind of the core asset that we look forward, how do we take that across.
Our operations.
Yeah.
Great. Thanks, very much I'll pass it on.
Great we're going to try to get a couple more questions and here. We know we're at the hour Mark, but we'll get a couple more questions.
Perfect. Thank you.
Question comes from Matt Mcginley.
Mmk. Please go ahead your line is open.
Thank you with the overall revenue growth had been up 2% if not for Massachusetts or was that comment that you made specific to the CPG segment.
I think your overall message in the prepared remarks was that Massachusetts would improve into the second quarter, but it also sounded like you were still in the process of aligning your inventory composition to what the market wants and that those issues.
Could still carry into the second quarter. So I guess, what's the message into the second quarter relative to the first specific to Massachusetts.
Okay.
Yes, so when we talked about the 2% growth absent, Massachusetts that was in its entirety of wholesale and retail so.
Without that we would have grown 2% sequentially from a cultivation standpoint, as Greg noted earlier some of the improvements that we are seeing in subsequent harvests, we will see some of the benefit in Q2 and in subsequent quarters and in the second half of the year and integration Wise I think we're in a better place again, we've got a quarter under our belt now five months.
Under our belt of the integration so in a much better place now.
Got it and on the G&A, how much of that increase in G&A dollars compared to last quarter is related to the retail growth relative to the inflation that you noted and would the impact of those merit based increases boost the G&A dollar rate from the 69 $69 million from here or is that more of a onetime step up so the dollars are likely.
Hover close to closer to that number in subsequent quarters.
Yes from a from an SG&A standpoint, the big piece of the growth from Q4 to Q1 was related to increased retail.
As we open additional stores and we had a full quarter of the loral harvest and cure pen.
Facilities in our books.
As it relates to mirror, what you saw in the first quarter, we will carry forward through the balance of the year are those those increases went into effect January one. So we saw did see the full quarter impact of merits.
Okay. Thank you very much.
Thanks, Matt.
Pat I think Youre asking your question.
Our final question comes from Scott Fortune at Roth Capital Partners. Please go ahead.
Good morning, and thanks for all the detail just real quick kind of follow up <expletive>, Florida. The goal to be a top three position there in the state of recent product launches congratulations on that and how combined institution in additional stores and you look at the premium product rollout to the stores. How are you looking at additional vertical <unk>.
And capacity in this data is going to look at that going forward here.
That's part of the question Greg.
So overall I think if you look at our performance in Florida, historically coming into the quarter. We have been predominantly focused just on flower.
What's exciting about what we're able to bring to market in Q1 is starting to not only expand our flower offerings also expand our manufactured goods.
And that's really helping us in Florida grow our baskets, where we were losing patients from our stores, we're going to buy things like edibles at other retailer and now we're looking forward to keeping all of those patients and delighting them with our products in our own stores, that's going to continue through the course of this year, we're bringing innovation to market, we're very pleased with.
Choose are performing in this day and we've got some other interesting innovation that's on top of our launches. It go in the quarter. So that really will be focused on driving basket growth within our existing stores.
As it comes to new stores.
In Q1, we were able to open three new stores and then as we look at the back half of this year.
To ramp that up of new store openings pushing back into towards Q4.
Thanks for the color I appreciate it.
Alright, Thank you Scott.
Yeah.
This concludes our Q&A session I would now like to pass back over to Charlie for any final remarks.
Just a quick thank you for everybody for joining the call today, and we look forward to delivering our Q2 results later this year and hope everybody has a great rest of the week bye.
Bye bye.
Thank you everybody. This concludes today's call you may now disconnect.
Okay.
Okay.